Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· JPY BOJ stays pat at .25%
· EUR French and Italian Trade Balance improve
· CHF Swiss Retail <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Sales jump above 3%
· USD CPI, Philly Fed on tap
BoJ declined to raise rates to 50bp at its monthly policy board meeting tonight, bowing both to political pressure from PM Abes government and to the growing realization that Japanese consumer demand has simply been weaker than the central banks initial forecast. In his post announcement press conference the bank noted that the economy has so far deviated slightly downward from the outlook.Indeed the latest data including the sharper than expected drop in Tertiary activity and the downward revision of the LEI numbers are confirming the banks assessment that another rate hike may be premature.
The net result of todays action was further pummeling for the yen, as the unit set two year lows against the greenback and took out the 157.00 level against the euro and the very important 240 barrier against the pound. Although at first glance the picture couldnt look more dour for yen longs, we suspect that this latest up move in USDJPY is far closer to a near term end rather than beginning. The simulative effect of 30% drop in oil should provide the Japanese consumer with considerably more disposable income and with Japanese unemployment at decade lows it will only be a matter of time before consumer demand perks up. In short the only question vis a vis future BoJ rate hikes is not if but rather when. Still for the time being the yen remains the FX worlds favorite whipping boy and market sentiment will not begin to warm towards the currency until Japanese economic data begins to produce better results. With little on the calendar next week save for the CPI data, the pair may consolidate between 120-122 for the time being,
One interesting aspect of tonights market reaction has been the particularly poor performance of the Swiss franc, as the unit came within 3 points of the 1.6200 level on the EUR/CHF cross. In a classic case of throwing baby out with the bath water, the market has decided to sell all the low yielders and as the currency with second smallest yield in the industrialized world, the Swissie has suffered from its association wit the yen. Yet there are considerable differences between the two economies, not the least of which is the fact that the Swiss consumer is far healthier than his Japanese counterpart. Todays Swiss Retail Sales printed at 3% versus 1.8% forecast while the ZEW survey of economic expectations improved to -10.8 from -23.7.
The rally in the EURCHF pair has been driven by the disparity in the pace of rate hikes between the SNB and the ECB last year. However, with ECB choosing to hold off on rate hikes until March and with SNB strongly signaling that it will continue the rate normalization process, at the very least the two central banks should match each other as the year progresses. Furthermore, with the Swissie so markedly weaker against the euro, the SNB may be fearful of importing inflation and may opt for a 50bp hike at its next meeting. In either case the Swissie appears to be grossly oversold against the euro and if the Swiss economic data continues to impress such imbalances are not likely to last for long.
